management accounting

BU5571 – Management Accounting – Resit Assignment Management Report and reflection…

General Information • Due: Noon on Tuesday 14th July 2020

• One submission: o One “soft copy” (MS Word file) through the “Turnitin” link in the “Resit Alternative

Assessment” folder on MyAberdeen o DO NOT copy any text from online, previous work, other students or a textbook. The

“Turnitin” submission link will check for any copying. Marks will be deducted for anything found to have been copied. Please source your material correctly or write in your own words.

• Only include ID number on submission (to maintain anonymity when marking)

• 2 questions to answer.

Question 1 (1,500 words): HiTec Power Solutions

HiTec Power Solutions (HiTec) is a fast-growing European manufacturing business. The company had developed a special, longer-lasting cell phone battery whose product code is MS (for Macht Strom). The MS is now beginning to gain wider recognition and acceptance by cell phone manufacturers since a growing number of users prefer this brand to cheaper, but shorter-life batteries. As a result, HiTec is entering into a period of business growth and so has put together plans for expansion.

As expected, the company’s budget for the current financial year anticipates some increase in sales. During the first quarter, 32,000 units of MS were sold and this was considered a great success in comparison with past results. HiTec’s plan for the second quarter was based on a 25% increase in sales over the first quarter (40,000 units).

The company is now in the process of compiling its performance reports for the second quarter, which ended on 30 June 2018. The sales target was achieved and Mrs Lisa Harrison, the Chief Executive Officer (CEO), is very pleased. She is looking forward to receiving the Income Statement for the second quarter just ended. Naturally, she expects that it would “reflect the company’s new-found success,” as she wrote in an e-mail to the Financial Controller (FC), Mr Mike Hughes.

HiTec is preparing to discuss additional finance to fund the planned expansion with their bank. To justify a new loan request, Mrs Harrison is excited about the prospect of the company presenting a set of strong second-quarter results. She is convinced that that would help the company make a strong case that would persuade the bank to approve the additional loan request.

The company’s Board of Directors is due to meet soon and in preparation for that, Mr Hughes has sent the CEO an advance copy of the company’s Income Statement for the first and second quarters (see below). The statement shows that the net operating income in the second quarter is substantially lower than that of the first. It was prepared under the company’s absorption costing policy, which is highly favoured by the CEO.

HiTec – “Absorption Costing” Income Statement for Q1 and Q2

Quarter 1 (£) Quarter 2 (£)

Sales 4,000,000 5,000,000

Cost of Sales: Opening Inventory 525,000 1,225,000 ADD: Production Cost 3,500,000 2,450,000

Production (available for sales) 4,025,000 3,675,000 LESS: Closing Inventory 1,225,000 175,000

Cost of Sales 2,800,000 3,500,000 Under/Over absorbed Fixed overheads 0 2,800,000 600,000 4,100,000

Gross Profit 1,200,000 900,000

Selling and Administration expenses 775,000 825,000

Net Operating Income 425,000 75,000

The significant reduction in net operating income reported was very shocking to Mrs Harrison who felt certain that there had to be an error somewhere. She immediately wrote to the Mr Hughes demanding that “the numbers be corrected and the problem resolved without delay!” In her reply, Mr Hughes stated:

“I can assure you, Lisa, that the net operating income is correct as reported. Although sales went up during the second quarter, the problem is in production. You see, we budgeted to produce 40,000 units each quarter. However, there was major flooding in one of our supplier's plants, main warehouse, and the surrounding region during part of the quarter. As a result, some essential components were not shipped to us in time. This forced us to cut production back to only 28,000 units in the second quarter. It is this reduction in production that gave rise to the drop in net operating income.”

Mr Hughes explanation did not satisfy the CEO:

“I don’t see why you are more interested in discussing production when my clear instructions to you are to have the incorrect drop in income corrected. What do weather conditions in the operating region of another company have to do with the sales that we achieved, which, in any case, was 40,000 units, as expected? What if production dropped? Does that cancel the increased income that we made from increased sales? If sales go up, then income must go up. If this simple, common-sense equation cannot be reflected in your reports, then it might be about time for some changes to be made!”

Budgeted production and sales of MS for the year, along with actual production and sales for the first two quarters, are given below:

HiTec – “Absorption Costing” Income Statement for Q1 and Q2

Q1

(actual) Q2

(actual) Q3

(budgeted) Q4

(budgeted)

Budgeted Sales (units) 32,000 40,000 40,000 48,000

Actual Sales (units) 32,000 40,000 - -

Budgeted Production (units) 40,000 40,000 40,000 40,000

Actual Production (units) 40,000 28,000 - -

The company’s production process is heavily automated. This leads to very high production overhead costs per quarter. In line with company policy, the fixed production overhead cost is absorbed into units at a rate of £50 per unit (based on the budgeted production shown above). Any under-applied or over-applied fixed overhead is charged directly to cost of sales for the quarter.

The company had 6,000 units of MS in inventory at the start of quarter one. The selling and administrative expenses include both fixed and variable elements.

Your task: You were recently hired by HiTec as Assistant Management Accountant reporting directly to Mr Hughes. He has assigned to you the task of putting together a response to the CEO to explain the situation. Specifically, he has asked that you first prepare data tables that will show and help to clarify the following:

1.

a) “product cost per unit” for Q1 and Q2 under the “absorption (full) costing” method (showing the fixed and variable parts of the cost)

b) “product cost per unit” for Q1 and Q2 under “marginal (variable) costing”

c) the fixed and variable parts of selling and administration overheads

d) a “contribution statement” for Q1 and Q2 under marginal (variable) costing

2.

a reconciliation of the “absorption costing” and the “marginal (variable) costing” net operating income figures for each quarter.

Furthermore, Mr Hughes has asked you to produce a draft report (using appropriate numbers from the tables produced above), to explain to the CEO the results of Q2 in comparison with Q1. He is keen that your report should include:

3.

a) a clear explanation of the characteristic of absorption costing that caused the drop in net operating income for the second quarter

b) some suggestions of what Mr Hughes could have said to Mrs Harrison to explain the problem

c) a discussion of the differences between “marginal (variable) costing” and “absorption (full) costing”

d) identification of the advantages and any disadvantages of using the “marginal (variable) costing“method for internal reporting purposes

Required: 1,500 words, excluding Excel tables

You are required to prepare a management report to explain the above situation. Your data tables must be clear and complete with workings that show how your numbers were calculated. The written part of your report should be around 1,500 words and use numbers from the question and your data tables to support and illustrate your discussion of the above situation.

Marking guide: The following should help guide you on the amount of effort expected for each task:

% of marks

1,500 words 1 Calculations and data tables (from excel and embedded in report)

35%

a. “product cost per unit” for Q1 and Q2 under the “absorption (full) costing” method (showing the fixed and variable parts of the cost)

b. “product cost per unit” for Q1 and Q2 under “marginal (variable) costing”

c. the fixed and variable parts of selling and administration overheads

d. a “contribution statement” for Q1 and Q2 under marginal (variable) costing

2. a reconciliation of the “absorption costing” and the “marginal (variable) costing” net operating income figures for each quarter

20%

3 Written Report

35%

a. a clear explanation of the characteristic of absorption costing that caused the drop in net operating income for the second quarter

b. some suggestions of what Mr Hughes could have said to Mrs Harrison to explain the problem

c. a discussion of the differences between “marginal (variable) costing” and “absorption (full) costing”

d. identification of the advantages and any disadvantages of using the “marginal (variable) costing“ method for internal reporting purposes

General:

10% 4. Presentation – excel tables embedded inside written report; quality and neat formatting; spelling and grammar; remember it has to be “useful for the purpose”, not just “look nice”…

Total 100%

Question 2: As a trainee management accountant, you are supplied with the following information. Sales for October, November, and December are expected to be £200,000, £180,000, and £220,000, respectively. All sales are “on-credit” and a 2% cash discount is given if paid within 30 days. Sales are collected 50% in the month-of-sale and 50% in the following month. Accordingly, one-half of all sales discounts accounted for (on average). Materials are purchased one month before being required, and all purchases and expenses are paid for as they happen. Activities for the quarter are expected to be:

October November December Materials used £40,000 £36,000 £44,000 Salaries £70,000 £68,000 £72,000 Maintenance and repairs £18,000 £18,000 £18,000 Depreciation £36,000 £36,000 £36,000 Utilities and other £14,000 £14,000 £14,000 Dividends paid £10,000 Payment on bonds £8,000 £8,000 £8,000

Required: Using the given information, calculate the budgeted net cash flow for November. (30% of the marks) Part B: Browning Ltd. has the following budgeted sales for the selected six-month period:

Month Unit Sales

June 15,000 July 20,000

August 35,000 September 25,000

October 30,000 November 20,000

There were 7,500 units of finished goods in inventory at the beginning of June. Plans are to keep an inventory of finished product equal to 20 percent of the unit sales for the next month. Three kgs of materials are required for each unit produced. Each kg of material costs £20. Inventory levels for materials equal 30 percent of the needs for the next month. Required:

(a) Prepare production budgets in units for July, August, and September. (15% of the marks)

(b) Prepare a material purchases budget in kgs and £s for July, August, and September. (30% of the marks)

(c) Briefly explain any criticisms of the traditional budgeting system, and how budgeting relates to “management performance evaluation” (25% of the marks)

(Total: 100% of marks)

General Notes on copying and plagiarism:

• After submitting your “soft copy”, the “Turnitin” software will compare your submission to other student submission on the same course and compare with information online – do not copy!

• This is an individual assignment and any suspected plagiarism or copying will be taken seriously and referred to the relevant Business School Committee for consideration (which may result in reduction in marks, or a mark of zero)

• Submission date: Tuesday 14th July 2020, noon (UK Time)

Any Questions:

• Please email any question to Andrew Mulhern – [email protected]